In April 2019, Jet Airways had to shut its operations due to lack of funds. As a result, more than 16,000 employees of the airline were rendered jobless within a day. The move came as a surprise as there were no signs such as cost-cutting, changes in strategy, or any other measure to give the employees any idea of the trouble brewing within the airline. As it was a sudden shutdown, most employees had no back-up plan that could save them from this storm.

They are now struggling to meet their household expenses and other distresses that come with job loss. The group insurance cover for employees also lapsed due to non-payment of premium by the company, leaving the employees without any insurance protection.

That's how unpredictable life is. Like an unexpected guest, unpleasant times may arrive at your door any time without warning and stay as long as it likes. Examples include job loss, medical emergencies, loss of sole-earning member, disability due to illness/accident, etc. which does impact your personal/family income.

This highlights the need for everyone to build contingency fund (also known as emergency fund, rainy day fund). We cannot prevent or predict the arrival of unpleasant times, but we can surely reduce its impact with the help of contingency fund.

[Read: Why is Contingency Fund so important?]

Many people ignore the need to have an emergency fund. They realise its importance only when something untoward happens to them or their family. If you have emergency reserves for such times it will reduce your stress to a large extent and you will be able to handle difficult times with confidence. You will also be saved from taking loans and falling into the debt trap.

Ideally, you should have 12-24 months' worth of expenses saved towards contingencies. It may seem too big a contribution, but as mentioned earlier, you can never be certain for how long the difficult times will make its presence felt. You can start by setting up an emergency fund for 3-6 months of your necessary expenses and gradually keep increasing your reserves.

To determine the size of the emergency corpus, you will need to take into account your various expenses such as daily expenses, life and health insurance premium, EMI if any, and other expenses that must be absolutely met no matter what the situation is. If you do not have medical insurance, you should have bigger rainy day corpus to be able to cope with rising medical expenses should such situation arise. Contributions towards investment can be put off for a while.

[Read: Have You Built A Rainy Day Fund Wisely?]

Contingency fund must be easily available to you whenever there is a need. Therefore, contingency fund must be parked in safe and liquid avenues. The purpose of a rainy day fund is not to earn high returns, but to have instant access to fund in case of emergency.

Here are some avenues where you can park contingency fund:

1. Bank savings account

   Bank savings account is always a preferred option of many people to park their surplus money. It is also suitable option to park your emergency corpus. Banks provide interest rate of 3.5-6% on such deposits, depending on the bank.

   If you wish to earn a slightly higher percentage than savings account while maintaining liquidity, you can opt for other facilities provided by banks such as Recurring deposit, Sweep-in Account, or a Flexi-deposit.

2. Ultra Short and Short term debt funds

   If you want to park your money for 3 to 6 months, consider investing it in ultra-short-term debt funds. Such funds invest in securities that mature before or after 91 day period. Just remember that these funds may levy exit load if redeemed within a specific period.

   You can park a small percentage of your fund in short term debt as you may not be in the need of the fund for 3-5 years at a stretch. However, such funds may attract an exit load if redeemed within 6-12 months.

3. Liquid or Money market funds

   Liquid funds invest in money market instruments like Treasury bill, Certificate of Deposits, and Commercial Papers with maturity of up to 91 days only. These funds do not have any entry or exit load. If you are looking to park your fund for up to 3 months you can invest in liquid funds.

   Ideally, you should keep a major allocation towards saving deposit (around 50%) and the rest can be invested across liquid, ultra-short and short-term funds. Though the aim here is not to earn returns, inflation cannot be ignored which can erode the value of your hard-earned money. Thus, you may compare the interest rates of different avenues before you decide to park your contingency fund.

We strongly recommend to start saving up for a rainy day if you haven't done so already. If you have already saved up, determine if the amount will be sufficient to help you sail through 12-24 months.

In life just as with investments, you have to hope for the best, but prepare for the worst.

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Comments
jyoti.pandya@gmail.com May 13, 2019 Nice Article. Please keep me updated more. Thanks and Regards
superbom4@gmail.com May 15, 2019 The Banks and financial institutions had bully the Organisation so to prevail other competitors. As against this what about Air India the very Govt. owned Organisation making cros of rupees lossess for years together and the Same SBI & Others are financing even today without any hitch. Public funds are not only wasted but lavishly - without any hinderances.

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